Sunday, July 29, 2012

A recent opinion piece by Teresa Ghilarducci in the New
York Times took on what she termed a “ridiculous approach to retirement,” drawn
from what appears to be a series of “ad hoc” dinner conversations with friends
about their “retirement plans and prospects.”

Most of the op-ed focused on the perceived shortfalls of the voluntary
retirement savings system: People don’t have enough savings, don’t know how much
“enough” is, make inaccurate assumptions about the length of their lives and
their ability to extend their working careers, and aren’t able to find qualified
help to help them make more appropriate savings decisions. In place of the
current system, which Ghilarducci maintains “will always fall short,” she
proposes “a way out” via mandatory savings in addition to the current Social
Security withholding. Consider that, just three sentences into the op-ed, she
posits the jaw-dropping statistic that 75 percent of Americans nearing
retirement age in 2010 had less than $30,000 in their retirement accounts.

“You don’t like mandates? Get real,” she declares.

When we looked across the EBRI database of some 2.3 million
active1 401(k) participants at the end of 2010 who were between the
ages of 56 and 65, inclusive – people who have chosen to supplement Social
Security through voluntary savings – we found only about half that number (37
percent) with less than $30,000 in those accounts. Moreover, when looking at
those in that group who have more than 30 years of tenure, fewer than 13% are in
that circumstance – and neither set of numbers includes retirement assets that
those individuals may have accumulated in the plans of their previous employers,
or that they may have rolled into Individual Retirement Accounts (IRAs), as well
as pensions or other savings (see Average IRA Balances a Third Higher When Multiple Accounts are
Considered).

That’s not to say that the financial challenges outlined in the op-ed won’t
be a reality for some. In fact, EBRI’s Retirement Security Projection Model®
(RSPM) developed in 2003, updated in 20102, finds that for Early Baby
Boomers (individuals born between 1948 and 1954), Late Baby Boomers (born
between 1955 and 1964) and Generation Xers (born between 1965 and 1974), roughly
44 percent of the simulated lifepaths were projected to lack adequate retirement
income for basic retirement expenses plus uninsured health care costs (see “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from
the 2012 EBRI Retirement Security Projection Model”) .

The op-ed declares that a voluntary Social Security system “would have been a
disaster.” Indeed, an objective observer might conclude that that is why
Congress originally established Social Security as a mandatory system, to
provide a base of income for retirees as it still does today. With the
underpinnings of that mandatory foundation of Social Security, the current
voluntary system was established to allow employers and individuals to
supplement that base. In recent decades Social Security’s benefits have been
“reduced” by increases in the definition of normal retirement age, and a partial
taxation of benefits, despite increases in the mandatory withholding rates, in
order to adjust to the realities of rising costs from changing demographics.
Even before the recent two-year partial withholding “holiday,” Congress was, and
is still today, discussing additional adjustments to that mandatory system.

The voluntary system should be judged as just that, a voluntary system. As
noted above, the data makes it clear that voluntary employer-based plans are, in
fact, leading to a great deal of real savings accumulated to supplement Social
Security. Many in the nation work every day to encourage those savings to be
increased (see www.choosetosave.org
).

The “real” questions, certainly as one reflects on the debate over the
Affordable Care Act mandate, amidst today’s political and economic turmoil, are
whether the Congress and the nation will be willing – and able – to pay the
price of an expanded or new retirement savings mandate, and, regardless of that
outcome, how can a voluntary system be moved to higher levels of success?

Nevin E. Adams, JD

1 Active in this case is defined as anyone in the database with a
positive account balance and a positive total contribution (employee plus
employer) for 2010.2 The RSPM was updated for a variety of significant changes,
including the impacts of defined benefit plan freezes, automatic enrollment
provisions for 401(k) plans, and the recent crises in the financial and housing
markets. EBRI has recently updated RSPM to account for changes in financial and
real estate market conditions as well as underlying demographic changes and
changes in 401(k) participant behavior since January 1, 2010. For more
information on the RSPM, check out the May 2012 EBRI Notes, “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from
the 2012 EBRI Retirement Security Projection Model.”Last June EBRI CEO Dallas Salisbury participated in an “Ideas in Action with Jim Glassman” program discussion with
Ghilarducci and Alex Brill from the American Enterprise Institute titled
“America’s Retirement Challenge: Should We Ditch 401(k) Plans?” You can view it
online here.

Sunday, July 22, 2012

A couple of months back, my wife noticed a water spot on the ceiling of our
dining room. Now, it didn’t look fresh, but considering that that ceiling was
directly underneath the master bath, she had the good sense to call a plumber.
Sure enough, there was a leaky gasket—and from the look of it, one that had been
there for some time before we took ownership. Fortunately, the leak was small,
and the damage was minimal. Even more fortunately, we took the time to have the
plumber check out the other bathrooms, and found the makings of similar, future
problems well before the “leakage” became serious.

Homes aren’t the only place with the potential for problems with leakage. A
recent report on 401(k) loan defaults suggests that “leakage”—the money being
drawn out of retirement plans prior to retirement —is a lot larger than a number
of industry and government reports have indicated. In fact, the report (online
here) claims that “the leakage could be as high as $37 billion per year,”
although it completes that sentence by acknowledging that the estimate depends
“…on the source of the data on loans outstanding and the assumed default
rate.”

The paper promotes a recommendation that ERISA be amended so that plans could
choose to allow those who take out 401(k) loans to be defaulted into insurance
that would repay those loans on default. It looks at a number of different
sources to conclude that the available data do not really capture all the loan
leakage (because some of it is obscured as part of distribution upon
termination/separation from service), and that the available data do not (yet)
capture the impact of the prolonged economic slowdown that is evidenced in
other, non-401(k) loan trends.

Setting aside the validity of those conclusions, and the scale of their
impact on the analysis, the issue of “leakage” remains a focus for many in our
industry.

Late last year, an EBRI Issue Brief examined the status of 401(k)
loans, noting that in the 2010 EBRI/ICI 401(k) database, 87 percent of
participants in that database¹ were in plans offering loans, although as “has
been the case for the 15 years that the database has tracked 401(k) plan
participants, relatively few participants made use of this borrowing
privilege.”

Indeed, from 1996 through 2008, on average, less than one-fifth of 401(k)
participants with access to loans had loans outstanding. At year-end 2009, the
percentage of participants who were offered loans with loans outstanding ticked
up to 21 percent, but it remained at that level at year-end 2010 (see the full
report, online
here). This hard data, by the way, measuring activity by more than 23
million 401(k) participants.

If loan levels and amounts outstanding have remained relatively constant
during this period (which included the “Great Recession”), one might nonetheless
wonder about the overall impact on retirement readiness.

If you define “success” as achieving an 80 percent real replacement rate from
Social Security and 401(k) accumulations combined, looking at workers ages 25–29
(who will have more than 30 years of simulated eligibility for participation in
a 401(k) plan), then the decrease in success resulting from the COMBINATION of
cashouts, hardship withdrawals, and loans is just 6.1 percent.² The impact when
you add in the impact of loan defaults is less than 1 percentage point higher
(approximately 7.1 percent for all four factors combined).

Looking at the overall impact another way, more than three-fifths of those in
the lowest-income quartile³ with more than 30 years of remaining 401(k)
eligibility will still be able to retire at age 65 with savings and Social
Security equal to 80 percent of their real pre-retirement income levels, even
when factoring in actual rates of cashout, hardship withdrawals, and
loans—INCLUDING the impact of loan defaults.

The impact at an individual level can, of course, be more severe—something
that will be explored by future EBRI research.

A Problem to Fix?

There is, however, a potentially larger philosophical issue: whether the
utilization of these funds prior to retirement constitutes a “leakage” crisis
that cries out for a remedy. We don’t know how many participants and their
families have been spared true financial hardship in the “here-and-now” by
virtue of access to funds they set aside in these programs. Nor do we know that
individuals chose to defer the receipt of current compensation specifically for
retirement, rather than for interim (but important) savings goals—such as home
ownership or college tuition—that make their own contributions to retirement
security. It’s hard to know how many of these participants would have committed
to saving at all, or to saving at the amounts they chose, if they (particularly
the young with decades of work ahead of them) had to balance that against a
realization that those monies would be unavailable until retirement.

In fixing the recent leakage problem in our home, the plumber replaced the
worn gaskets, but at the same time sought to improve on things by tightening (as
it turns out, over-tightening) some of the connections further up the line. That
extra step produced an unanticipated outcome that didn’t show up until the next
day, in dramatic fashion. Like my plumbing problem, retirement plan “leakage,”
unminded, has the potential to cause damage—to deplete and undermine retirement
savings. However, a view that all pre-retirement distributions from these
programs are a problem that requires redress not only ignores the law and
regulations as written, it also has the potential to create unanticipated
changes in savings behaviors.

And the data—based on hard data from actual participant balances and
activity—indicate that such concerns are at least somewhat premature.

- Nevin E. Adams, JD

Notes

¹ The EBRI/ICI Participant-Directed Retirement Plan Data Collection Project
is the largest, most representative repository of information about individual
401(k) plan participant accounts in the world. As of December 31, 2010, the
EBRI/ICI database included statistical information about 23.4 million 401(k)
plan participants, in 64,455 employer-sponsored 401(k) plans, representing
$1.414 trillion in assets. The 2010 EBRI/ICI database covered 46 percent of the
universe of 401(k) plan participants.² Workers are assumed to retire at age 65 and all 401(k) balances are
converted into a real annuity at an annuity purchase price of 18.62.
Additionally, the projections assume no break in contributions occurs with a
change in employers, that the maximum employee contribution is 6 percent of
compensation.³ Those in the higher income quartile have more trouble reaching the success
threshold, given the PIA formula in Social Security. Cashouts, loans and
hardship withdrawals have approximately the same impact as for those in the
lowest income quartile.

Sunday, July 15, 2012

A recent paper from the Center for Retirement Research
at Boston College was titled “401(k) Plans in 2010: An Update from the SCF.”
The SCF1 (perhaps better known to non-researchers as the Survey of
Consumer Finances) is, as its name suggests, a survey of consumer households “to
provide detailed information on the finances of U.S. families.” It’s conducted
every three years by the Federal Reserve, and is eagerly awaited and widely
used—from analysis at the Federal Reserve and other branches of government to
scholarly work at the major economic research centers. The 2010 version was
published in June.

As valuable as the SCF information is, it’s important to remember that it
contains self-reported information from approximately 6,500 households in 2010,
which is to say the results are what individuals told the surveying
organizations on a range of household finance issues (typically over a 90 minute
period); of those households, only about 2,100 had defined contribution
retirement accounts. Also, the SCF does not necessarily include the same
households from one survey period to the next.

The CRR analysis incorporated some of the SCF data (ownership of a retirement
plan account, participation, median 401(k)/IRA account balances, asset
allocations within those accounts, and distribution/loan patterns). The report
then brings in data from other sources on features such as automatic enrollment,
hardship withdrawals, and IRAs to complete its assessment, summarized on its
website as “Progress in the 401(k) system stalled in the wake of the economic
crisis.”

The summary went
on to note that “despite an increase in auto-enrollment, the percent of
employees not participating ticked up,”“401(k) contributions slipped,
while leakages through cash outs, loans, and hardship withdrawals
increased”—and that, “…the typical household approaching retirement had
only $120,000 in 401(k)/IRA holdings in 2010, about the same as in 2007.”
Setting aside for a moment the question of what “typical” is, a logical research
question arises: Are these statements a researcher’s extrapolation, or based
upon hard data, and thus “facts”?

What We Know

EBRI research has previously noted that, while the financial crisis of 2008
had a significant impact on retirement savings balances, as recently as just a
month ago, more than 94 percent of the consistent participants in the EBRI/ICI
401(k) database2 are estimated to have balances higher than they did
at the pre-recession market peak of October 9, 2007 (see “Returns
Engagement”). According to a number of industry surveys, participation
rates have remained relatively consistent, despite the soft economy and
tumultuous market environment, and EBRI research finds comparable trends in loan
activity (see “401(k)
Plan Asset Allocation, Account Balances, and Loan Activity In
2010”). Also, at year-end 2010, the data show that 401(k) loan balances
outstanding declined slightly from those in the past few years.

What else do we know?

We know that the number of future years that workers are eligible to
participate in a defined contribution plan makes a tremendous difference in
their at-risk ratings (See “Opportunity
Costs”).

(2) As of December 31, 2010, the EBRI/ICI database included
statistical information on about 23.4 million 401(k) plan participants, in
nearly 65,000 employer-sponsored 401(k) plans, representing $1.414 trillion in
assets. The 2010 EBRI/ICI database covered 46 percent of the universe of 401(k)
plan participants, and 47 percent of 401(k) plan assets.

(3) When analyzing the change in participant account balances over
time, it is important to have a consistent sample. Comparing average account
balances across different year-end snapshots can lead to false conclusions. For
example, the addition of a large number of new plans (arguably a good event) to
the database would tend to pull down the average account balance, which could
then be mistakenly described as an indication that balances are declining, but
actually would tell us nothing about consistently participating
workers.

Sunday, July 08, 2012

By some accounts, inertia has long been the bane of the voluntary
retirement system—and a great deal of money and time has been spent overcoming
the reluctance of workers to become savers, and of savers to do so at levels
sufficient to achieve their retirement goals.

That same inertia likely accounts for the fact that, once set on a
savings course, or better still, set on one that improves on that initial
setting,1participants in
overwhelming numbers appear to “stay the course”—and do so through good times
and times that aren’t as good.

So, what happens to those participants who stay the course, those
“steady,” consistent participants?

The Employee Benefit Research Institute (EBRI), through the EBRI/ICI
Participant-Directed Retirement Plan Data Collection Project, has long tracked
the changes in consistent participant accounts in a database that is the
largest, most representative repository of information about individual 401(k)
plan participant accounts in the world.2 The EBRI/ICI project is
unique because it includes data provided by a wide variety of plan
recordkeepers and, therefore, portrays the activity of participants in 401(k)
plans of varying sizes—from very large corporations to small businesses—with a
variety of investment options.

Drawing from that database, which includes demographic, contribution,
asset allocation, and loan and withdrawal activity information for millions of
participants, EBRI has for years produced estimates of the cumulative changes
in average account balances—both as a result of contributions and investment
returns—for several combinations of participant age and tenure.

And, for those millions of individual participant accounts in the
database, we are able to project changes in those average balances based on
actual individual rates of contribution and the investment choices in place at
a specific point in time.3

As a result, we are able to estimate that the average account balance
of an individual ages 25‒34,
with one to four years of tenure at his or her current employer,4 increased
4.6 percent in June, while a participant ages 55‒64
with 20‒29 years of
tenure had an average account increase of 2.5 percent.5

This capability is significant for several reasons.It provides a monthly update of a
comprehensive perspective on 401(k) account movement.It has provided the ability to quickly and
accurately estimate the impact of major market swings on a broad swathe of the
401(k) market.6

And it serves to remind us that those 401(k) balances are affected not
just by the investment markets, but by the savings we invest—consistently.

2 As of
December 31, 2010, the EBRI/ICI database included statistical information on about
23.4 million 401(k) plan participants, in 64,455 employer-sponsored 401(k)
plans, representing $1.414 trillion in assets.

3 That
specific point in time being the annual update of recordkeeping information
from data providers, currently 12/31/2010. The projections assume no change in
behavior (such as deferral rates or interfund transfers).

4 For
individual participants in the database from December 31, 2010 to the valuation
date of June 30, 2012.

5 Note
that that increase is based on not just investment returns, but also new
contributions.Note also that contributions
tend to have a larger percentage impact on the rate of growth in smaller
accounts.

Sunday, July 01, 2012

There’s been a lot of talk lately about the need to fix the “broken”
401(k) plan.Some say it
disproportionately benefits higher-paid workers, some claim it can’t provide a
level of retirement income sufficient to meet lower-income needs, and still
others maintain it can’t provide that level of security for anyone.And, as often as not, those sentiments arise as part of a discussion
where folks wistfully talk about the “good old days” when everybody had a defined
benefit pension, and people didn’t have to worry about saving for retirement.

Only problem is—those “good old days” never really existed, nor were
they as good as we “remember” them.

Consider that only a quarter of those age 65 or older had pension
income in 1975, the year after ERISA was signed into law.The highest level ever was the early 1990s,
when fewer than 4 in 10 (both public-
and private-sector workers) reported pension income, according to EBRI
tabulations of the 1976–2011 Current Population Survey (in 2010, 34 percent had
pension income).

Perhaps more telling is that that pension income, vital as it surely
has been for some, represented just 20 percent of all the income received by
those 65 and older in 2010.In the “good
old days” of 1975, it was less than 15 percent.

In fact, in 1979, just 28 percent of private-sector workers were
covered “only” by a defined benefit (DB) plan (another 10 percent were covered
by both a DB and a defined contribution plan), according to Department of Labor
Form 5500 Summaries.In other words, even
in the “good old days” when “everybody” supposedly had a pension, the reality is
that most workers in the private sector did not.

Even among those who worked for an employer that offered a pension, most in the private sector
weren’t working long enough with a single employer to accumulate the service
levels you need for a full pension.Nor
is this a recent phenomenon; median job tenure of the total workforce has hovered
about four years since the early 1950s (in fact, as EBRI’s latest research
points out, the average median job tenure has now risen, 5.2 years).[i]For private-sector workers, fewer than 1 in 5 have ever spent 25 years or more with
one employer. Under pension accrual formulas, those kind of numbers mean that even
among the workers who qualify for a pension, many are likely to receive a negligible
amount because their job tenure is so short.

Ultimately what this suggests is that, even when defined benefit
pensions were more prevalent than they are today, most Americans still had to
worry about retirement income shortfalls.

Indeed, Americans today do have some additional concerns: longer lives
and longer retirements to fund, as well as the attendant issues of higher
health care costs and long-term care.For
most workers—past and present—the more savings options they have, the better;
and the easier we make it for them to save, the better.That is the power of payroll deduction,
matching contributions, and employer action.

When all is said and done, we’re all still challenged to find the
combination of funding—Social Security, personal savings, and employment-based
retirement programs—to provide for a financially satisfying retirement.

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About Me

Nevin is Chief Content Officer for the American Retirement Association. Previously he was Director, Education and External Relations at the Employee Benefit Research Institute (EBRI), and Co-Director, EBRI Center for Research on Retirement Income (CRI), and before joining EBRI in late 2011, he spent 12 years as
Editor-in-Chief of PLANSPONSOR magazine and its Web counterpart, PLANSPONSOR.com, at that time the nation’s leading authority on pension and retirement issues. He was also the creator, writer and publisher of PLANSPONSOR.com’s NewsDash, which had become the industry’s leading daily source for information focused on the critical issues impacting benefits industry professionals.